Informativeness of trade size in foreign exchange markets

•We investigate the informativeness of trade size in an electronic spot foreign exchange market.•Large currency orders are likely placed by informed traders.•Large trades are associated with increased exchange rate volatility.•Small orders increase the likelihood of extreme events.•Large orders from informed traders tend to be more concentrated.

This article investigates a trading strategy that relies on private information in an electronic spot foreign exchange market. In a structural microstructure model extended for high-frequency data, our analysis links the informational content of trading activity to order size. We find that large currency orders are likely to be placed by informed traders during increased price volatility episodes. In addition, the data suggest that excess kurtosis in exchange rate returns (corresponding to large price-contingent trades) is significantly lower than that in small trades.